Scratching My Head (and Shoulders) Over Pattern in Bank ETF

 | Apr 20, 2017 | 6:00 AM EDT
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Stock quotes in this article:

XLF

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wfc

I was asked an interesting question today that I want to share with you. This reader asked if I get a lot of questions about the head-and-shoulders top in the Financial Select Sector Fund (XLF) .

My first reaction was that I drew this pattern in for you (using the Bank Index, but it's the same chart) a few weeks ago when XLF first plunged to $23, so folks should know where I stand on it; after all, I drew in that right shoulder before we even had the bounce.

But then I considered it further. And in reality, I have not seen that many others point it out. Usually I draw in a potential head-and-shoulders pattern and, once it maps out (i.e., the shoulder fills in), I begin to see the chart everywhere with folks highlighting the pattern. Yet oddly, I do not see this chart all over Twitter or on TV. I suppose that's why I say there remains a lovefest in this group, although admittedly it has dissipated quite a bit with the decline in Goldman Sachs (GS) and Wells Fargo (WFC) . (Wells Fargo is part of TheStreet's Action Alerts PLUS portfolio.) 

So why aren't I seeing folks show this pattern as a top? Are they so convinced that bonds are going down and financials will excel? I even saw someone say Goldman was the outlier in bad earnings so it was OK to buy the financials again. So I suppose that's the answer: Folks feel as though the financials are down enough to buy now, and they are not scared of the head-and-shoulders top.

Someone else told me that if he takes the DJIA off his screen, then Wednesday's action was really OK, the market was flat. Then I saw the folks on television highlight the fact that the transports and the Russell 2000 were both green on Wednesday, so the market was much better than the DJIA. These same folks never once mentioned the Russell and the transports when they went down daily and the DJIA went up daily back in February. But now they are terrific.

All of that is anecdotal. Statistically, we saw the put/call ratio for the VIX sink to 10% Wednesday. That is quite extreme. It's an awful lot of call buying for the VIX (a bet on a higher VIX, lower stocks). The last time it got this low was August 2015, about 10 days before the mini-crash. There were two other such low readings (10% or under) in 2015, in May and June. There were two such readings in 2014 as well, June and August. Most led to rallies in stocks near term but nothing led to a multiweek rally.

To add to this, the put/call ratio for ETFs soared to 200%, yet another extreme bet on the market going lower. Are these short-term signs of caution or are they hedging in front of the French elections this weekend?

For my part, I will stick with my view that we should rally in the near term and come back down again because it continues to feel incomplete to me. So far, the short-term rally has been a grind at best.

For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week.

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